A Study On Underpricing On IPO Market Based On Two-step Screening

IPO, short for Initial Public Offerings, means the first time for public offering. The IPO underpricing of an initial public offering is very common, especially in China. In this article, we pay main attention on the inelastic screening capacity. When theIPO market is overheating, the demand for the screening capacity is increasing. At the same time, the inelastic screening capacity makes the supply of screening insufficient. The more the demand is, the more insufficient the supply is. In this situation, bad corporations have the incentives to pretend to be good corporations in order to get financing. As a result, the average IPO quality will decrease, and the expected underpricing will change. With the frequency of screening increasing, more and more bad corporations go into IPO market, the quality of screening will go down for the pressure from screening demand.The comparative statics produced by this model tells us some useful conclusions: increased income for investment bankers, high levels of underpricing, a reduction in underwriting standards, and a flood of marginal investment projects. For the purpose of defusing these troubles, we must enlarge the screening capacity; adjust the proportion between the fresh men and the old stagers in screening. If the supply of the screening stagers could be enlarged and the quality holds the same, the troubles above will be defused as soon as the screening capacity is not the bundling condition.In international market, we could get some empirical conclusions: the increase of the quantity of the labor can not make screen efficient, also not a high level average IPO quality, in the opposite, bring a low level average IPO quality.